Russian pension funds to be invested in securities that caused 2008 financial crisis
Mortgage bonds, which gained infamy in 2007-2008 when they bankrupted Bear Stearns, sent markets plummeting and caused a global financial crisis, will now be promoted in Russia using national pension savings.
The Russian Finance Ministry, Central Bank and the Agency for Housing Mortgage Lending (Dom.RF) have approved a roadmap to develop the mortgage bond market, with banks “packaging” physical entities’ mortgage loan payments and reselling them to investors.
Such bonds will be included in the list of assets which the pension savings administered by VEB can be invested in. State-owned corporations, the federal budget and the housing provision fund for soldiers will also be authorized to invest available funds in these packages.
Overall, there are plans to attract 7 trillion rubles (around $107 billion) of investment into mortgage bonds. According to the roadmap, this would help to lower the cost of loans by 1-1.5 percentage points and thereby fulfill President Putin’s order to bring mortgage lending rates down to 8% by 2024.
The initiators of the roadmap believe that it will be easier for banks to make mortgages cheaper if they can immediately attract new money after issuing a loan.
One issuer of mortgage securities will be Dom.RF Mortgage Agent, a division of Dom.RF (formerly “Russian Capital”), which is currently being audited by the Public Prosecution Service, according to a statement by the Accounts Chamber.
The audit showed that Russia’s primary construction bank has been involved in “complex multi-level schemes” to embezzle construction revenue, which has resulted in the disappearance of 90,000 square meters of residences in an unknown location. In addition, after receiving 84 billion rubles ($1.28 billion) from the government, the bank reflected only 58 billion ($0.89 billion).
Dom.RF’s involvement in the mortgage scheme will look like this: After issuing a loan to physical entities, the bank will sell a portfolio of encumbrances to the mortgage agent (Dom.RF’s subsidiary) and receive mortgage-backed securities (bonds) in exchange. If there is a default on the loan, Dom.RF is obligated to buy back the defaulting encumbrance. The bank may leave the bond on the balance sheet or sell it to an investor.